Patterns of Dependence during 1986-2000

The economic recovery in the 1990s strengthened demand for oil, but overall demand did not outpace supply. The 1990s was a consumer market, in a sense that there was large excess capacity in the world. During this period the influence of the kingdom increased with respect to other rentier states. Because oil prices were low and the kingdom maintained high reserves, it had the capability to pressure prices either upward or downward. With oil prices already in the range of 13 to 24 dollars less than the price levels of the 1975-1985 period, further drops in prices were bound to generate major fiscal imbalance for oil rentier states. The kingdom, therefore, held some leverage over other rentier states. Under these conditions the kingdom was asymmetrically dependent on consuming countries, but other rentier states were asymmetrically dependent on the kingdom. According to hypothesis two, when the rentier state is dependent on the consumer, it is likely to employ internal balancing and validation at lower intensity and is unlikely to use external validation and balancing. By the same token, when the producers are dependent on the rentier state, neo-rentier theory predicts that the rentier state is likely to apply external validation and external balancing (hypothesis three).

Before moving to a discussion on security strategies in the next section, in what follows I briefly discuss the financial situation of the kingdom during this period. As a result of weaker oil prices and slower demand, the financial position of the Saudi state was weaker in comparison with the 1970s and early 1980s. As shown in table 36, as a result of the of the Iraq invasion of Kuwait, oil prices briefly jumped to 20 dollars. However, it rapidly dropped to 15 dollars a barrel in 1993, and five years later, in 1998, it plunged to 12 dollars a barrel. As oil prices declined, revenues also declined. In contrast to an average of 220 billion SR during the period 1980-1985, oil revenues plummeted to an average of 64 billion SR in the second half of the 1980s. To boost revenues, the kingdom abandoned its role as a swing producer and adopted an oil policy aimed at securing larger market share, instead of defending a certain oil price. It aggressively increased production. The primary objective of this policy was to compensate for loss of revenues caused by depressed oil prices. In contrast to the first half of the 1980s, when Saudi Arabia cut back production in order to moderate prices, in the second half of the 1980s and throughout the 1990s market share was a top priority, not price. Therefore, the kingdom did not adjust production to prop up the slumped price in 1993 and 1998. Instead, oil exports were raised to more than 6 mbd throughout the 1990s.

Table 36. Saudi Arabia Oil Revenue, 1986-2000

Year Oil Revenue (Million SR) Oil Revenue as Perventage of Total Revenue Oil Price Arabian Light Oil Export (1,000 b/d) 1986 42464 56 13.73 3,266 1987 67405 65 17.23 2,417 1988 48400 57 13.40 3,030 1989 75900 66 16.21 3,336 1990/1991* 246297 78 20.82 4,500 1992 128790 76 17.94 6,582 1993 105976 75 15.68 6,293 1994 95505 74 15.39 6,234 1995 105728 72 16.73 6,291 1996 135982 76 19.91 6,109 1997 159985 78 18.71 6,185 1998 79998 56 12.20 6,390 1999 104447 71 17.45 5,720 2000 214424 83 26.81 6,253 .

* Budget allocation for fiscal year 1991 was amalgamated with the budget for 1990. Source: Saudi Arabian Monetary Agency (SAMA), Tables of Annual Report; For Oil Exports: OPEC, Annual Statistical Bulletin, 2007

Because oil revenues provided the overwhelming part of total revenues, it was inevitable that the budget would be affected as the prices decreased. As shown in table 37, the budget turned to a deficit – and even exploded during the Gulf War. The fiscal year 1990, which was merged with 1991, reflects a jump in the deficit as a consequence of extra military spending. Initially the government responded to the deficit by lowering public spending. Thus, spending was reduced from 284 billion SR in 1981 to 137 billion riyals in 1986. After 1986, however, the policy of reducing public spending was reversed. Only in certain years, slight reductions were made when prices plunged; otherwise, in spite of the running deficits, government expenditures fluctuated, but did not sink to the 1986 level (see table 37). Meanwhile the budget swelled.

To balance the budget, the government needed to increase revenues and reduce expenditures. Both measures, however, were deemed to be politically risky. Drastic reductions in expenditures were perceived to undermine the tacit pact between the state and society, in which economic rewards were exchanged for acquiescence and support for the regime. As for revenues, the kingdom could do very little. With oil production at more than 6 mbd, the kingdom could not risk higher exports, lest the oil price would collapse. Instead, to help finance the deficit, the government turned to foreign reserves as well as domestic and foreign debt. By 1994, domestic government debt reached 100 billion dollars, approximately 77 percent of the country’s GDP, and that proportion was projected to reach 110 percent by 2000.292 Although the government was loath to borrow from international banks, in 1997 J. P. Morgan, a premier investment bank, arranged a syndicated loan of 4.3 billion dollars.293 In 1998, when the oil price plummeted to as low as 12 dollars per barrel, the government turned to Abu Dhabi for a loan in the amount of 5 billion dollars. Most significantly, however, as shown in the next sub-section, the government did not institute taxes nor did it drastically cut expenditures on social services. Some subsidies were cut. For example, agriculture subsidies were reduced; consumer products subsidies, such as gasoline, electricity, water, were reduced; and government services fees were increased. But as Gause puts it: “These baby steps alone cannot put the Saudi fiscal house in order.”294

292

New York Times, June 30, 1996. 293

New York Times, June 23, 1998. 294

Table 37. Budgetary Deficit and Surplus (Million SR), 1986-2000 Year Total Revenues Total Expenditure Deficit/S urplus 1986 76,498 137,422 -60,924 1987 103,811 184,919 -81,108 1988 84,600 140,856 -56,256 1989 114,600 154,870 -40,270 1990/1991 316,639 487,425 -170,786 1992 169,647 238,987 -69,340 1993 141,445 187,890 -46,445 1994 128,991 163,776 -34,785 1995 146,500 173,943 -27,443 1996 179,085 198,117 -19,032 1997 205,500 221,272 -15,772 1998 141,608 190,060 -48,452 1999 147,454 183,841 -36,387 2000 258,065 235,322 22,743

Source: Saudi Arabian Monetary Agency (SAMA), Annual Reports, Various Years.

7.2 Internal Validation and Internal Balancing in the Bust Era